02. Commercial Business Park

SITUATION:

The Borrower was part of an LLC heavily invested in commercial office space and industrial based properties. This particular asset under duress (and facing foreclosure) was a commercial business park; primarily composed of numerous small office buildings, an industrial manufacturing facility, and a few large bulk warehouses

The owning LLC took possession of the business park in near May of 2006 by securing a CMBS loan for the principal amount of $7,420,000. The commercial loan followed a common 30-year amortization schedule, but with only a 5-year repayment term. A balloon payment was due for the outstanding principal still owed in June of 2016.

Near the 4th quarter of 2008, competition for tenants spiked dramatically as a result of a surging availability of nearby office and industrial spaces. As a national economic collapse unfolded, many business park owners found themselves forced to offer historically high concessions in an attempt to fill the dark spaces created by failing tenants and bankrupted business operations.

The borrower group, in turn, lost several of its stable tenants. Although these occupants seemed to possess the strength to weather the economic storm, the highly discounted rates suddenly offered by desperate, neighboring office parks drew them away.

The LLC’s management team employed aggressive tactics to maintain occupancy rate by offering deep concessions of their own. Leasing rates per Square Foot were at their lowest rates in years. However, ownership could not keep pace with the downward cycle. Following several consecutive quarters of steep losses, the property failed to generate cash flows sufficient to meet debt service requirements. Soon thereafter, the loan fell into default.

A special servicer was assigned by the bank and took swift action. A receiver was appointed by the state courts and the borrower lost all managing control. The receiver continued chasing the spiraling decrease in asking rents and eventually lowered rates to $1.65/SF. The special servicer also began a track to foreclosure. Additionally, the servicer deeply scrutinized the borrower’s management efforts and pursued full recourse for violation of carve-outs under the loan documents’ bad-boy clauses.

WHAT WAS DONE:

Alliance Commercial Group’s mitigation team successfully negotiated a discounted purchase of the note. The team's experience in reaching resolutions with special servicers led to the implementation of a purchase agreement which successfully waived defeasance, penalties, and default interest. In addition, the servicer agreed to drop the recourse action and released the guarantor from all personal liability as a provision of the transaction. In summary, Alliance secured an agreement in which the special servicer approved the borrower’s offer to purchase the note for $4,950,000, a significant reduction from over $7,000,000 still owed on the original debt.

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News

Long Island’s shrinking industrial space has placed expanding tenants in a tough spot, forcing them to look east to Suffolk County and off the island entirely, according to real-estate services firm JLL.